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TMI Blog2016 (1) TMI 936X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 20/09/2011. The AO also disallowed expenses to the extent of Rs. 54,31,383/-. The total income assessed to tax was Rs. 77,16,84,021/-. 3. In brief, the AO had made following disallowances: a) TPO noticed that assessee had lent loan to its AE to the extent of Rs. 104.28 crores. TPO added arm's length interest on the amounts advanced to AE on the basis of internal commercial borrowing and rejected assessee's submission to treat the advance on external commercial borrowing based on LIBOR rates. b) TPO noticed that assessee had given corporate guarantee to its AE to consortium of banks. He calculated arm's length guarantee fee and added arm's length guarantee fee of 2% on the loan guaranteed. c) AO disallowed selling and distribution expenses of Rs. 50,00,000/- and repairs & maintenance of Rs. 431,383/-, though the said expenses were explained with supporting bills/vouchers, by observing that possibility of inflation cannot be ruled out in view of the voluminous transactions effected. 4. Aggrieved with the assessment order, assessee preferred appeal before the CIT(A). CIT(A) had given relief to the assessee as under: i) ALP Adjustment on interest on advance to AE: CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AR submitted that the assessee had the option of funding the SPV either in the form of share capital or loan. The decision on the funding in the form of loan was a business decision based on commercial expediency. Ld. AR also submitted that the acquisition for which the loan was given helped the assessee to increase its global foot print and to leverage the strength of the combined entities for better efficiency and bargaining power with suppliers and customers. Ld. AR submitted that the above financing of loan to its AE are not international transaction as basic objection and even otherwise it is accepted as international transaction, the TPO erred in bench marking international transactions with interest rates in the domestic market instead of LIBOR as the base and not the Indian PLR/interbank rate. Ld. AR relied on the following decisions: 1. Four Soft Pvt. Ltd. Vs. DCIT [2014] 149 ITD 732 (Hyd.) 2. Siva Industries & Holdings Ltd. Vs. ACIT [2011] 59 DTR 182 (Chennai) 3. VVF Ltd. Vs. DCIT[2010-TIOL-55-ITAT-MUM] 4. Cotton Naturals (I) Pvt. Ltd., Vs. DCIT (ITA No. 5855/Del/2012) 8. Ld. DR relied on the order of AO/TPO. He submitted that the Four Soft Pvt. Ltd. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment while determinat ion of ALP on the shareholders corporate guarantee provided to bank on behalf of WOS. 8. Determining the ALP on the shareholder corporate guarantee provided by the Appellant @ 1.25% on the guarantee amount. 9. Not appreciating the fact that WOS was set up as a SPY for acquisition of business in USA. 10. Not appreciat ing that the shareholder corporate guarantee is not covered under the def init ion of internat ional transact ion u/s 92B of the Act . 11. Not appreciating that the amendment to section 92B would not apply to the facts of the case. 12. Not under taking an object ive analysis for determining the ALP on the shareholder corporate guarantee. 13. Not making adjustments for the dif ferences in the comparable transact ions selected vis-a-vis shareholder corporate guarantee provided by the Appellant. 14. Discr iminat ing the US WOS by determining the ALP for shareholder-corporate guarantee vis-a-vis similar shareholder corporate guarantee provided by parent companies to Indian subsidiar ies in violat ion of Ar ticle 26 of India - US Double Taxation Avoidance Agreement. ('DTAA') . Revenue's ground 3. The learned CIT (A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of AO/TPO and justified the action of the AO. 13. After taking into consideration the above decision of the tribunal and the ratio of the four soft pvt. Ltd. (supra), we hold that the corporate guarantee is an international transaction. For the sake of clarity and ready reference, we reproduce the relevant paras below: 25.4 In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75%, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is provided by a group company. In case of Glenmark Pharmaceuticals Vs. ACIT in ITA No. 5031/Mum/2012, dated 13/11/2013, the Mumbai Bench of the Tribunal after analysing the facts in that case had held that 0.53% corporate guarantee rate in that case was appropriate. The ITAT Hyderabad Bench in case of Infotech Enterprises Ltd. in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, it was held that the conditions for issuance of corporate guarantees are distinct and separate from bank guarantee. Accordingly, the Hon'ble High Court upheld ITAT decision of guarantee commission @ 0.50%. The relevant portion of ITAT, Mumbai decision is reproduced for convenience: 21. So far as the learned Senior counsel 's content ion that guarantee commission is not an internat ional transact ion and there could not be any method for evaluating the ALP for the guarantee commission, we do not find any mer it in the said content ion in view of the amendment brought by the Finance Act, 2012 with retrospective effect from 1-4- 2002 by way of Explanat ion added in Sect ion 92B. Payment of guarantee fee is included in the expression ' internat ional transact ion' in view of the Explanat ion i(c) of Sect ion 92B. Once the guarantee fee falls within the meaning of 'internat ional transact ion', then the methodology provided in the rules also becomes applicable. Here in this case, it is undisputed that the assessee in its T.P. Study Report and also the TPO, have accepted that it is an internat ional transact ion and CUP is the most appropr iate method for benchmar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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